You know you love a good benchmark: a way to compare your progress to the gold-standard, or at the very least the progress of other people you know. It’s undoubtedly one of the reasons we all collectively went crazy about knowing our credit scores… except you probably got a bit too fanatical about your credit score. It’s far from the only indicator of your overall financial health. In fact, the other number you desperately need to know is probably one of which you’ve never even heard: debt-to-income ratio.
What is debt-to-income ratio?
Debt-to-income ratio, or more commonly DTI, is a calculation to determine how much debt you’re carrying relative to your income. Before you freak out — it’s not based on cumulative debt to annual income. If that were the case, student loans alone would put many people at over 100 percent debt. Instead, the calculation is based on your monthly debt obligations to income situation.
Who is likely to use your DTI?
Your DTI will come into play when you need to borrow money. That could be refinancing student loans, an auto loan, mortgage or personal loan. Lenders use your DTI to determine if you’re a worthy borrower and the maximum amount you could borrow given your other financial obligations. Sure, your credit score is also a factor used by lenders, but DTI provides a more comprehensive view of your financial ability. It gives lenders far more knowledge about just how much more debt you could feasibly handle each month.
A credit score really just provides a lender with a snapshot in time, and the credit score can be more volatile than DTI. One month where you accidentally miss a payment because you were traveling internationally and it slipped your mind can tank your credit score. And using more of your credit card limit than normal because it’s holiday shopping season or opening a new account because you’re trying to travel hack for free flights (and you will definitely pay off your credit card in full each month!) can ding your score. But your DTI isn’t going to fluctuate quite as easily because fewer factors influence the percentage. Lenders want to know as much as possible about you before giving you money. They want security that you’re reliable and will pay it back. So just one metric (the credit score) isn’t enough to convince them of your trustworthiness.
What is a good DTI?
Your DTI goal is the inverse of your credit score. You want a high number with a credit score, but the goal is a low debt-to-income ratio. Unfortunately, there isn’t a cut-and-dry answer to what is an ideal DTI because it does vary based on lender. However, the Consumer Financial Protection Bureau cites 43 percent as the highest ratio you can have and still be approved for a Qualified Mortgage. A general rule of thumb is to keep your DTI below 36 percent.
What can be done to improve your DTI?
There can be a two-pronged approach when trying to improve your DTI. First, you can focus on reducing your monthly debt obligations. Eliminating consumer debt, like credit cards, is a great way to start. Second, you can aim to increase your overall income while avoiding incurring any new debt. A higher gross monthly income with the same monthly debt burden automatically reduces your DTI. Reducing debt and increasing income really helps improve your DTI quickly.
Your DTI may not ever be something to get you loads of love on Instagram or retweeted hundreds of times, but it is one of the key ways you’ll be financially judged. Being aware of your DTI and aiming to keep reducing your overall debt burden should be a top priority as you move forward in your financial life.
How to find your DTI
You could do the basic calculation yourself: (required monthly debt payment) ÷ (gross monthly income) and then x 100 to equal the percentage. Or you could ditch doing the calculations yourself and use online tools. My new favorite (and free) tool is Turbo, from the makers of TurboTax. It will pull not only your DTI but also your credit score and verified income. With that information, Turbo gives you tips and advice on how to improve your financial life and feel empowered, so you never need to worry about whether or not lenders will find you alluring.
Do you have big financial goals in 2018? Share your #RealMoneyTalk moment with us @BritandCo and@IntuitTurbo!
(Photo via Getty)
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Erin Lowry
Erin Lowry is a millennial personal finance expert and author of “BROKE MILLENNIAL: Stop Scraping By and Get Your Financial Life Together.” Based on the successful blog of the same name, the book is a step-by-step guide to go from flat-broke to financial badass. Lowry uses wry humor and hilarious true stories to keep readers entertained. Lowry and her work have been featured on CBS Sunday Morning, CNBC, Fox & Friends, USA Today, Wall Street Journal, Cosmopolitan, and NBC News. Lowry lives in New York City with her fiancé and their spunky rescue dog Mosby.
FAQs
there is no hard-and-fast-rule. Here's what we can say: if your score is good, let's say higher than a 660, then you'll probably qualify. Of course, that assumes you're buying a house you can afford and applying for a mortgage that makes sense for you.
What does a 700 credit score get you? ›
A 700 credit score is also good enough to buy a house. You can even find lenders that will consider you for higher-value homes requiring “jumbo” mortgages. Your credit score is one of many factors that determine mortgage interest rates.
How many credit cards should I have for an 800 credit score? ›
If your goal is to get or maintain a good credit score, two to three credit card accounts, in addition to other types of credit, are generally recommended. This combination may help you improve your credit mix.
How to go from 700 to 800 credit score? ›
To reach an 800 credit score, you'll want to demonstrate on-time bill payments, have a healthy mix of credit (meaning accounts other than just credit cards), use a small percentage of your available credit, and limit new credit inquiries.
What credit score is needed to buy a $300K house? ›
What credit score is needed to buy a $300K house? The required credit score to buy a $300K house typically ranges from 580 to 720 or higher, depending on the type of loan. For an FHA loan, the minimum credit score is usually around 580.
What is the lowest credit score needed for a house? ›
Credit score needed to buy a house by mortgage type
| Loan Type | Minimum Credit Score |
|---|
| Conventional loans | 620 |
| FHA loans | 500 (with 10% down payment); 580 (with 3.5% down payment) |
| USDA loans | 640 |
| VA loans | The VA has no minimum limit, but lenders generally like to see at least 620 |
1 more rowJan 10, 2024
Highlights: While older models of credit scores used to go as high as 900, you can no longer achieve a 900 credit score. The highest score you can receive today is 850. Anything above 800 is considered an excellent credit score.
How can I raise my credit score 100 points overnight? ›
10 Ways to Boost Your Credit Score
- Review Your Credit Report. ...
- Pay Your Bills on Time. ...
- Ask for Late Payment Forgiveness. ...
- Keep Credit Card Balances Low. ...
- Keep Old Credit Cards Active. ...
- Become an Authorized User. ...
- Consider a Credit Builder Loan. ...
- Take Out a Secured Credit Card.
As someone with a 650 credit score, you are firmly in the “fair” territory of credit. You can usually qualify for financial products like a mortgage or car loan, but you will likely pay higher interest rates than someone with a better credit score. The "good" credit range starts at 690.
What credit score do most Americans have? ›
The average FICO credit score in the US is 717, according to the latest FICO data. The average VantageScore is 701 as of January 2024. Credit scores, which are like a grade for your borrowing history, fall in the range of 300 to 850. The higher your score, the better.
Credit experts advise against closing credit cards, even when you're not using them, for good reason. “Canceling a credit card has the potential to reduce your score, not increase it,” says Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.
How rare is 825 credit score? ›
Membership in the 800+ credit score club is quite exclusive, with fewer than 1 in 6 people boasting a score that high, according to WalletHub data.
What is the average credit score by age? ›
Average Credit Score By Age
| Average FICO® Score By Age Group In 2023 |
|---|
| Generation Z (18 – 25) | 680 |
|---|
| Millennials (26 – 41) | 690 |
| Generation X (42 – 57) | 709 |
| Baby Boomers (58 – 76) | 745 |
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A perfect credit score of 850 is hard to get, but an excellent credit score is more achievable. If you want to get the best credit cards, mortgages and competitive loan rates — which can save you money over time — excellent credit can help you qualify. “Excellent” is the highest tier of credit scores you can have.
How rare is credit score over 800? ›
According to a report by FICO, only 23% of the scorable population has a credit score of 800 or above.
What can a 708 credit score get you? ›
What Does a 708 Credit Score Get You?
| Type of Credit | Do You Qualify? |
|---|
| Home Loan | YES |
| Personal Loan | YES |
| Auto Loan | YES |
| No Annual Fee Credit Card | YES |
2 more rowsYour credit score has less bearing on your ability to get a mortgage than you might think. The minimum FICO score for a conventional loan is 620. The best rate comes with a score of 740 or higher.
What kind of mortgage can I get with 700 credit score? ›
Assuming the rest of your finances are solid, a credit score of 700 should qualify you for all major loan programs: conventional, FHA, VA and USDA loans all have lower minimum requirements, and even jumbo loans require a 700 score at minimum.
What credit score is needed for a house? ›
Each lender will have its own criteria for what credit score is needed to qualify for a mortgage and even what is considered a “good” score. However, as a general rule of thumb, you'll need at least a 680 credit score to qualify with a traditional lender, such as one of the Big Six Banks.
